THE competition watchdog yesterday pointed towards store sales and improved terms for suppliers as it outlined remedies for the possible takeover of Safeway by rivals.

While the Competition Commission has yet to make any decisions regarding the battle for Safeway, an exhaustive issues letter raised concerns about bids from Asda, Sainsbury's and Tesco and their potential threat to competition.

A bid from Morrisons, which started the bidding war in January, could be "pro-competitive", the commission said, because it would maintain four supermarkets operating on a national scale.

The Competition Commission is examining whether any of the proposed deals would create an excessively dominant supermarket group which would damage shoppers and suppliers.

At the heart of the bids are local and national competition issues, prices and the impact of the potential mergers on suppliers.

Possible remedies outlined yesterday include divestments of stores and the supermarkets' distribution networks.

The letter also suggested a possible strengthening of the Office of Fair Trading's code of practice for relationships with suppliers.

The Competition Commission has suggested "levelling the playing field" for suppliers' terms to ease any fears that the successful bidder for Safeway could squeeze suppliers.

The letter also appeared to rule out considering competition for non-food sales as well as groceries and disregarded the impact of internet home shopping and the price of petrol in its inquiry.

The number of issues identified for consideration by the Competition Commission in its 14-page remedies statement highlights the complexity of the competition situation surrounding supermarkets.

A potential combination of ITV giants Carlton and Granada attracted a 26-point letter from the Commission in April.

A remedies letter is always sent out before the Commission has reached any conclusions to give the opportunity for comment on possible ways which any adverse effects of a merger might be overcome.

The Commission could yet block all of the proposed bids, with the top three of Tesco, Asda and Sainsbury's all viewed as unlikely to be given the green light to acquire the entire Safeway portfolio without selling off some stores.

Tesco chief executive Sir Terry Leahy said, "As we have previously stated and as the Commission notes, the current proposals affecting the future of Safeway raise serious issues as to whether a structural change, which could see the four major retailers become three, should be permitted."

That leaves Bradford-based Morrisons, headed by Sir Ken Morrison, to become the fourth force in UK supermarkets if it gets the go-ahead.

Morrisons kicked off the battle for Safeway in January when it offered &#xA3;2.9bn to buy the 479-store Safeway chain.

A bid is still expected to come from retail entrepreneur Philip Green. His potential takeover of Safeway does not fall within the remit of the competition inquiry as he was given the all-clear to bid by the government.

Before yesterday's letter, City bookmakers had Asda as favourite to win the bidding war, with Mr Green a close second. Morrisons was third favourite to win Safeway's hand.

In May the Commission took evidence from the supermarkets at a special hearing in London, where the four pledged lower prices, enhanced competition and thousands of new jobs from a post-merger Safeway.

The Commission inquiry, headed by Sir Derek Morris, is due to report its findings by August 12.

Retail analyst Rhys Williams at stockbroker Seymour Pierce said, "Morrisons is more than likely to get through the most unscathed. The rest are likely to be blocked and it won't be worth their while pursuing bids.

"Morrisons will have to divest a few stores but it is more limited and less disruptive than what this appears to be saying about the rest of the supermarket groups."